BY: Ted Barnaby
If you were to walk into a full-scale city with skyscrapers, condos, malls and shops—and there wasn’t a single person to be seen for miles, your first question would probably be: where the hell did everyone go? But walking into one of China’s desolate ghost cities isn’t a question of where everyone went—it’s why they never came in the first place.
China’s economic boom has dubbed them as the world’s second largest and fastest growing global economy. Living in China today is financially similar to what US citizens experienced during the economic boom of the American dream. Middle-class families finally have money, and they’re ready to invest. Since the state-controlled economy prohibits citizens from investing abroad, everybody puts their money into real estate and construction.
Prices have been steadily rising for decades; you’d be crazy not to want a piece of that pie. Families are purchasing five, sometimes even ten homes in emerging cities, hoping to sell them for double, even triple the price once the city is complete. After 30 years of a steady growing economy, most seem settled into the idea that the good times are built to last.
Developers are also building as many homes as possible, eager to capitalize on the high demand, even if it means they have to take out massive loans. As long as people keep buying, they’ll be able to sell the properties and pay back their loans. But what happens if people suddenly stop buying?
Welcome to Chinese ghost cities.
The cities of Ordos in China’s province of Inner Mongolia and Zhengzhou in Henan province, for example, were recently constructed. Tens of millions of rural villagers have had their homes bulldozed to make room for these cities, in order to fulfill buyers’ demands, with a sweeping plan of urbanizing 250 million rural villagers. The problem is, the only people actually buying the apartments are investors. They have no interest in actually living there. Only two percent of its buildings were ever filled.
Of course if the cities actually filled up, these investment homes would reap a drooling profit. But if not the investors, who is going to fill these cities? The rural villagers who used to live on the land certainly can’t afford it.
The situation is highly reminiscent of the United States housing market crash of 2007. The bubble swells. Then it bursts.
In an attempt to prevent a historical re-run, China has enforced what amounts to a one-apartment policy for buyers in major cities. As of 2011, families can no longer purchase 5-10 apartments apiece, slowing down the speed of buying. However, this too has a major consequence. Remember those massive loans developers took out in order to feed the demand of the buyers?
The one apartment policy has slowed the buying process so much that the developers have gone into debt, forcing them to abandon projects in the midst of construction. The empty cities have become spotted with skeleton-bodied skyscrapers. The city of Tianjin, for example, has a business district larger than Manhattan—only the buildings are mostly empty or unfinished.
With developers in debt and the middle class in an investment deadlock, the government is starting to fear the possibility of social unrest. People who have invested their entire life savings into these properties will see their bank accounts plummet from the top of the cities’ empty apartment buildings.
Wang Shi, Founder of 53 billion dollar real estate empire, China Vanke Co., and the biggest home builder in the world, has already experienced demonstrations against his company. Wang Shi even admitted to television program, 60 Minutes, that if the bubble bursts, it could be “the next Arab spring”.
Of course, there are a few economists like Stephen Roach who will argue that the speculation about China’s prospective economic collapse is missing the point, and that the cities are necessary when pursuing mass urbanization.
I suppose when it comes to building the world’s largest cityscape, there are bound to be times of massive gain and devastating loss. As is convention, it’s the loss of the middle-class that draws the spotlight with low groans of lost savings. Of course, there is still the moral dilemma of the rural population who have been left destitute. However, in the realm of economics, these matters are typically swept under the rug.
The question is: if the real estate bubble bursts, who should be held accountable?
Of course the issue is complex, and no single person or organization can be put entirely to blame. However, it should be said that: if you provide the food, then you can’t blame your dog for eating itself to death.